ECB-Fed divergence and political upheaval could roil currencies and boost gold, analysts warn

Looming Israel-Iran conflict sees gold price and USD march in tandem - ‘Very powerful move to the upside’   

Gold markets navigate dollar strength amid geopolitical tensions

Gold is now the world’s reserve currency, and Trump’s tariffs and immigration policy will ‘wreck the boat’ – Nassim Taleb  

NEW YORK, June 17 (Reuters) - Wall Street indexes ended lower, oil kept climbing and U.S. borrowing costs fell on Tuesday as U.S. President Donald Trump left the Group of Seven summit early and investors awaited a series of interest rate decisions by major central banks.Trump returned to Washington a day before the summit ends as the Israel-Iran conflict intensified, saying U.S. patience was wearing thin but that he would not kill Iran's leader "for now."Yields on 10-year Treasuries fell, indicating stronger demand for a safe haven as investors weigh the conflict as well as preparing to parse Fed Chair Jerome Powell's tone at a scheduled update on Wednesday.Trump's early departure from Canada nixed hopes for more progress on issues like the tariffs he has promised to impose."The market was anxious to hopefully hear updates on trade agreements out of the G7 and the news of Trump leaving early was disappointing, although we all know why," said Eric Sterner, chief investment officer at Apollon Wealth Management."The market is paying attention to the (Middle East) conflict but it feels that's contained to those two countries," Sterner said. "It does cause concern, especially if Iran does anything with the Strait of Hormuz," he added, noting that around 20% of the world's oil supply passes through that waterway.U.S. crude continued to surge and settled 4.46% higher at $74.97 a barrel, while Brent rose to $76.54 per barrel, settling up 4.52% on the day.Stocks stayed under pressure, with the Dow Jones Industrial Average (.DJI), extending losses to end 0.70% lower on the day. The S&amp;P 500 (.SPX), fell 0.84% and the Nasdaq Composite shed 0.91%.There was no noticeable interruption to oil flows, and Qatar said its production at the world's largest gas field was steady after an Israeli air strike led Iran to partially suspend production.Money managers noted that the VIX volatility index (.VIX), opens new tab, sometimes known as Wall Street's fear gauge, has risen in the last week and hit a more than four-week high on Tuesday, but at 21.6 is well below historic highs. A tariff-induced rout sent it above 60 in April, closer to records above 80 hit during the 2008 financial crisis."This is like Stage 1 of moving towards a little bit of volatility," said Matt Thompson, co-portfolio manager at Little Harbor Advisors. "The way I read it right now, the VIX marketplace thinks (the conflict) is going to be contained."The VIX futures curve, which reflects longer-term volatility expectations, has lifted, Thompson added, "which indicates to me there is increasing demand for protection but the market is not really rushing."Earlier in the day, in Europe, the STOXX 600 (.STOXX), closed around its lowest in three weeks.CENTRAL BANKS LOOMInvestors awaited meetings this week among governors of the Federal Reserve, Bank of England and Swiss National Bank. The Bank of Japan left short-term interest rates unchanged on Tuesday, at 0.5% as expected.The Fed is widely expected to leave interest rates unchanged at Wednesday's meeting, but market participants will be monitoring new projections on how Trump's tariffs could affect growth and inflation.Traders are pricing in two cuts by the end of the year."One thing that settled the markets earlier this year was the independence of the Fed and the fact they would not be influenced, but data-driven," said Matt Rubin, chief investment officer at Richmond, Virginia-based Cary Street Partners."Jerome Powell is going to continue to express that they are focused on data at this point, and that data does not warrant a cut."The U.S. 10-year note last yielded 4.389%, 6.5 basis points down from 4.454% late on Monday.Reporting by Isla Binnie in New York; Additional reporting by Amanda Cooper and Lucy Raitano in London and Johann M Cherian andAnkur Banerjee in Singapore; Editing by David Evans, Deepa Babington, Richard Chang and Matthew Lewis

Conflict concerns weigh on indexes, bolster oil and US debt

Currency debasement will drive gold price higher - Resolve Asset Management

The US intends to impose a quota on steel and aluminum imports from the United Kingdom that would be exempt from 25% tariffs as part of deal announced between the two countries during the G7 Summit on Monday.The quota plan is conditioned upon the United Kingdom’s meeting certain requirements on the security of steel supply chains and the ownership of relevant production facilities, according to an executive order released by the White House.(By Jarrett Renshaw and Andrea Shalal; Editing by Leslie Adler)

US looks to impose fresh steel, aluminum tariff quota on UK

Mali began construction of a new Russia-backed gold refinery on Monday, which the West African country’s military leader said would take it closer to asserting control over its natural resources.The 200-ton capacity facility, in which Mali has a controlling stake, will be built in partnership with Russia’s Yadran Group and a Swiss investment company.Mali’s interim president Colonel Assimi Goita said last year that all mining companies will be required to process their gold domestically under a revised mining code, without providing a deadline.That reflects a broader regional shift extending across the Sahel, where Guinea, Niger and Burkina Faso have also revised mining codes to mandate local processing, adding value to their exports and boosting the economic benefits of their resources.“Since 1980, Mali’s gold has been exported for refining and sale to countries such as the United Arab Emirates, South Africa, and Switzerland,” Goita said at the groundbreaking ceremony for the new plant in Senou, outside the capital Bamako.“This deprives our country of substantial revenues that could be used for the development of its economy.”The government has not provided a deadline for the plant’s completion. Once fully operational, it will process all gold produced in Mali into dore bars before it is exported, with a capacity nearly four times Mali’s annual gold production.Echoing comments from Goita, Yadran President Irek Salikhov said at the ceremony the refinery will become “a regional center for processing gold extracted not only in Mali, but also in neighboring countries — like Burkina Faso”.West Africa is a major gold producer, but lacks a functional and globally certified gold refinery despite attempts to create one including by Ghana, the continent’s top gold producer.The refinery is part of Goita’s sweeping mining reforms introduced since the military leader seized power in 2021 and severed relations with Western partners. Mali’s revised mining code, like those of neighbours Guinea, Niger and Burkina Faso, has rattled investors.A Malian court this month put Canadian miner Barrick’s Loulo-Gounkoto gold complex under temporary state control, escalating an ongoing dispute over Mali’s tax claims.Goita said the refinery would enable Mali to better track its gold production and exports. Like many African countries, it loses billions of dollars to gold smuggling due to the absence of certified gold refineries and traceability programs.(By Tiemoko Diallo, Idrissa Sangare and Maxwell Akalaare Adombila; Editing by Jessica Donati and Jan Harvey)

Mali starts construction of Russia-backed gold refinery

Hindustan Zinc, India’s biggest producer of the refined metal, has approved a project worth 120 billion rupees ($1.39 billion) to ramp up capacity, the miner said on Tuesday.The company will set up a metals complex with 250 kilo tonnes (kt) per annum capacity, at a location in the northern Indian state of Rajasthan where it already operates a zinc smelter.“This (project) is the first part (of a bigger plan). Within a month or two, we will come out with further parts,” CEO Arun Misra told Reuters, adding the company is aiming to nearly double its production to 2 million tonnes (mt) per annum from 1.02 mt.The company said it will use internal accruals and debt for the expansion.“Our estimated capital expenditure for doubling the capacity over the next five years should be between 320 billion rupees to 350 billion rupees in a phased manner,” CFO Sandeep Modi told Reuters.At peak capacity, Hindustan Zinc expects annual revenue of 620 billion rupees to 650 billion rupees.The newly approved 250 ktpa project, expected to be completed in 36 months, will begin generating cash accrual from its fourth year, Modi said.The current phase of the expansion also includes 30 kt of silver capacity addition.Silver is Hindustan Zinc’s second-largest business. The company aims to increase silver refining capacity to 1,500 tons per annum (tpa) from 800 tpa, CEO Misra said.Supply will remain tight, and our guess is by January 2027, silver prices should be around $41-$42 per ounce, Misra said.Hindustan Zinc is also interested in mining rare earth elements in India, and will be eager to invest in a bigger way when private players are allowed, Misra added.China, which controls more than 90% of global rare earth processing capacity, has restricted shipments, causing severe supply chain disruptions across the globe.($1 = 86.1560 Indian rupees)(By Manvi Pant and Sethuraman NR; Editing by Janane Venkatraman, Mrigank Dhaniwala and Shinjini Ganguli)

Hindustan Zinc approves $1.39 billion project

Obstacles to the supply of key raw materials from China have prompted truckmaker Daimler Truck to increase its inventories in the short term, CEO Karin Radstrom told reporters after a conference in Gothenburg on Tuesday.Radstrom said the chip crisis during the Covid-19 pandemic had already shown that vehicle manufacturing could no longer rely as heavily on just-in-time deliveries.The German truck manufacturer had since increased its inventory levels, for example of semiconductors, even if this tied up more capital, she said.“With everything that’s going on in the world right now, this seems to be a good and necessary strategy,” Radstrom told reporters.The automotive industry currently fears that the supply of rare earths, which are needed for magnets, will soon dry up due to new export regulations in China. Since April, exporters have had to apply for new export licences, which are only slowly being approved.China dominates the market for the raw materials, which are used in everything from electric motors to window mechanisms.Radstrom said the situation is currently a major issue for Daimler’s purchasing department, and the company is closely monitoring the issue.“So far, we seem to be getting what we need,” Radstrom added, saying there have been no production outages so far.(By Ozan Ergenay, Marie Mannes and Ilona Wissenbach; Editing by Jan Harvey)

Daimler Truck says rare earth supply concerns have led to more inventory building

WASHINGTON, June 17 (Reuters) - The Federal Reserve will consider plans to ease leverage requirements on larger banks at a meeting later this month, kicking off what is expected to be a broad effort to reconsider bank rules.The U.S. central bank announced the board meeting, scheduled for June 25, to discuss changes to the so-called "supplementary leverage ratio," which requires banks to set aside capital against assets regardless of their risk.Make sense of the latest ESG trends affecting companies and governments with the Reuters Sustainable Switch newsletter. Sign up here. The meeting will be the first following Fed Governor Michelle Bowman's confirmation as the central bank's top regulatory official. It could be the first of several rule-easing projects at the Fed as Bowman, a Republican tapped by President Donald Trump, has charted an ambitious plan for overhauling how the central bank regulates and monitors some of the nation's largest and most complex banks.The Fed did not provide any details on the proposal under consideration, but banks have clamored for years for changes to the supplementary leverage ratio, potentially by exempting traditionally safe assets or revising the formula used to calculate the requirement.The industry has argued the requirement was meant to serve as a baseline, requiring banks to hold capital against even very safe assets, but has grown over time to become a binding constraint on lending, and can actually hinder their abilities to intermediate Treasury markets during times of stress.Reporting by Pete Schroeder; Editing by Paul Simao

Fed announces meeting to discuss easing bank leverage rules

By Promit MukherjeeOTTAWA, June 17 (Reuters) - Members of the Bank of Canada governing council were concerned that underlying inflationary pressures led by trade disruption and uncertainty could persist for a long time, minutes of the meeting showed on Tuesday. The central bank held its key benchmark rate at 2.75% on June 4, citing the need to monitor the impact of U.S. tariffs on Canada and on rest of the world and how businesses and consumers adapted to it. Its summary of deliberations showed the members took into consideration the unexpected firmness in inflation data to take its rates decision and that the team spent considerable amount of time probing how trade policy was influencing prices."Underlying inflationary pressures could persist for an extended period as consumers and businesses adapt to the rewiring of global trade," the minutes said, even as the members acknowledged there could be downward pressure on prices too.Businesses have been reporting that they would pass on higher costs stemming from trade disruptions, the members noted, adding that surveys showed that even consumers see prices rising. Canada's annual inflation rate fell to 1.7% in April due to some tax removal, but closely tracked core measures of inflation rose above the bank's target range of 1% to 3% in the same month, stoking concerns that inflation was firming up.The governing council excluding impact of taxes, inflation was 2.3%, which was slightly above expectations.The fall in the rate of inflation to below 2% had helped the BoC to cut interest rates aggressively by 225 basis points since June last year, but the uncertainty and subsequent tariffs imposed by President Donald Trump has disrupted the bank's predictions."Members agreed that cost increases from trade disruptions may be playing a role in inflation in goods prices, but the direct impact from retaliatory tariffs was not yet evident," the summary said.The rate-setting team acknowledged that the pass-through of higher input costs to consumer prices would be difficult to track going forward.The governing council will closely track how inflationary pressures are evolving and carefully assess the timing and strength of the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs, the members agreed.The deliberations said if the recent firmness in underlying inflation were to persist, it would be more difficult to cut the policy rate.However, if the economy weakens and cost pressures are contained, there could be a need to cut rates in the future.(Reporting by Promit Mukherjee, editing by Dale Smith)((Reuters Ottawa bureau; promit.mukherjee@tr.com, opens new tab))Keywords: CANADA CENBANK/

Bank of Canada governing council is concerned inflation could persist for longer

WASHINGTON, June 17 (Reuters) - U.S. retail sales dropped more than expected in May, weighed down by a decline in motor vehicle purchases as a rush to beat potential tariff-related price hikes ebbed, but consumer spending remains supported by solid wage growth for now.The largest decline in sales in four months reported by the Commerce Department on Tuesday added to moderate job growth last month in suggesting that domestic demand was softening. That was reinforced by other data showing production at factories, outside motor vehicle assembly, decreased in May. President Donald Trump's aggressive and often shifting tariff position has heightened economic uncertainty, making it difficult for businesses to plan ahead. Federal Reserve officials meeting on Tuesday and Wednesday are expected to leave the U.S. central bank's benchmark overnight interest rate unchanged in the 4.25%-4.50% range while monitoring the fallout from the import duties and rising tensions in the Middle East."Tariff announcements have had a clear impact on the timing of large-ticket purchases, notably autos, but there are few signs yet that tariffs are leading to a general pullback in consumer spending," said Michael Pearce, deputy chief economist at Oxford Economics. "We expect a more marked slowdown to take hold in the second half of the year, as tariffs begin to weigh on real disposable incomes." Retail sales fell 0.9% last month, the largest decrease since January, after a downwardly revised 0.1% dip in April, the Commerce Department's Census Bureau said. The second straight monthly decline unwound the bulk of the tariff-driven surge in March.Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, decreasing 0.7% after a previously reported 0.1% gain in April.They increased 3.3% year-on-year in May.Sales last month were also held down by lower receipts at service stations because of cheaper gasoline as the White House's protectionist trade policy has raised fears over global growth, restraining oil prices. But hostilities between Israel and Iran have boosted oil prices. A 25% duty on imported motor vehicles and trucks came into effect in April. Unseasonably cooler weather likely also hurt sales. Receipts at auto and parts dealerships tumbled 3.5%. Sales at building material and garden equipment and supplies dealers dropped 2.7%. Receipts at service stations fell 2.0%, while those at electronics and appliance stores slipped 0.6%.Sales at food services and drinking places, the only services component in the report, declined 0.9%. Economists view dining out as a key indicator of household finances.But online sales jumped 0.9%, while those at clothing retailers increased 0.8%. Furniture store sales soared 1.2%. Sporting goods, hobby, musical instrument and book store sales advanced 1.3%.Retail sales excluding automobiles, gasoline, building materials and food services increased 0.4% in May after an upwardly revised 0.1% fall in April.These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have dropped 0.2% in April. People shop for groceries at Eastern Market in WashingtonA man shops for meat at Eastern Market in Washington, U.S., August 14, 2024. REUTERS/Kaylee Greenlee Beal/File Photo Purchase Licensing Rights, opens new tabDOWNSIDE RISKS MOUNTINGEconomists estimated that growth in consumer spending, which accounts for more than two-thirds of economic activity, was so far this quarter tracking at least a 2.0% annualized rate after slowing to a 1.2% pace in the first quarter.The Atlanta Fed is forecasting GDP rebounding at a 3.5% annualized rate in the second quarter. The anticipated surge will largely reflect a reversal in imports, which have fallen sharply as the frontloading of goods fizzled. The economy contracted at a 0.2% pace in the January-March quarter.Downside risks to consumer spending are, however, rising. The labor market is slowing, student loan repayments have resumed for millions of Americans and household wealth has been eroded amid tariff-induced stock market volatility. Economic uncertainty could lead to precautionary saving."The outlook for consumer spending is cloudy," said Bill Adams, chief economist at Comerica Bank.Stocks on Wall Street fell. The dollar rose against a basket of currencies. U.S. Treasury yields fell.Economists said retailers likely offered discounts last month, adding that could explain part of the benign consumer price data in May. They, however, expected price pressures to build up in the month ahead.That thesis was supported by a separate report from the Labor Department's Bureau of Labor Statistics showing import prices, excluding fuels and food, increased 0.4% in May after advancing 0.5% in April. In the 12 months through May, the so-called core import prices increased 1.3%.Core import prices are being driven by dollar weakness, with the greenback down about 6.2% this year on a trade-weighted basis. Trump's aggressive trade posture has shaken investors' confidence in the dollar, eroding the appeal of U.S. assets."This is another sign that inflation will pick up this summer and into the fall as prices start to reflect the higher costs for goods from enacted tariffs," said Ben Ayers, senior economist at Nationwide.A third report from the Fed showed manufacturing output edged up 0.1% in May, lifted by a 4.9% jump in motor vehicle and 1.1% rise in aerospace and miscellaneous transportation equipment production. That followed a 0.5% decline in April.But excluding motor vehicles, factory output fell 0.3% amid declines in fabricated metal products, machinery and nonmetallic mineral products. There was also a steep decrease in energy nondurable consumer goods production.Manufacturing, which accounts for 10.2% of the economy, relies heavily on imported raw materials.Trump has defended the duties as necessary to revive a long-declining U.S. industrial base, but economists say that cannot be accomplished in a short period of time, citing high production and labor costs as among the challenges."Continued uncertainty around where trade policy will ultimately land is preventing many businesses from taking on new capital expenditures, unsure of the policy and underlying demand environment," said Shannon Grein, an economist at Wells Fargo. "We expect manufacturing to continue to tread water in the months ahead."Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

Weak US retail sales, manufacturing output point to softening economy

NEW YORK, June 17 (Reuters) - U.S. stocks were lower on Tuesday, with indexes adding to losses in afternoon trading as the Israel-Iran conflict raged on for a fifth day, with the U.S. military moving fighter jets to the Middle East.Reuters reported, citing three U.S. officials, that the U.S. military is deploying more fighter aircraft to the Middle East and extending the deployment of other warplanes.President Donald Trump said that U.S. patience was wearing thin but it had no immediate intention to "take out" Iran's leader.In addition, Iran's semi-official Mehr news agency said Iran's senior army commander called on Israelis to evacuate Haifa and Tel Aviv immediately.The war began on Friday when Israel attacked Iran's nuclear facilities."We're in a period where visibility is not great, uncertainty is high, and the wall of worry is under construction," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, Minnesota.Besides the Middle East conflict, investors are closely watching for any new information on Trump's tariffs, his tax-cut bill and on U.S. interest rates.The Federal Reserve is expected to announce a monetary policy decision on Wednesday, although policymakers are expected to leave rates unchanged.All of the major S&amp;P 500 sectors were lower except for energy (.SPNY), which was up 1.7%, while shares of Exxon Mobil (XOM.N), were up 2%. Investors have worried that the conflict could create bottlenecks for oil exports from the oil-rich Middle East.The Dow Jones Industrial Average (.DJI), fell 323.28 points, or 0.76%, to 42,191.81, the S&amp;P 500 (.SPX), lost 51.45 points, or 0.85%, to 5,981.53 and the Nasdaq Composite (.IXIC), lost 189.33 points, or 0.96%, to 19,511.89.Among declining stocks, solar stocks fell after U.S. Senate Republicans late on Monday unveiled proposed changes to Trump's tax-cut bill, including a phase-out of solar, wind and energy tax credits by 2028.Shares of Enphase Energy (ENPH.O), dropped 23.2% and Sunrun (RUN.O), fell 39.4%.Eli Lilly (LLY.N), eased 1.6% after it agreed to acquire Verve Therapeutics (VERV.O), for up to $1.3 billion. Shares of Verve surged 79%.Earlier Tuesday, data showed U.S. retail sales dropped more than expected in May, while factory production barely rose last month.Declining issues outnumbered advancers by a 2.04-to-1 ratio on the NYSE. There were 76 new highs and 65 new lows on the NYSE.On the Nasdaq, 1,369 stocks rose and 3,013 fell as declining issues outnumbered advancers by a 2.2-to-1 ratio.Additional Reporting by Kanchana Chakravarty and Sukriti Gupta in Bengaluru; Editing by Maju Samuel

Indexes fall as conflict between Israel and Iran intensifies

NEW YORK, June 17 (Reuters) - U.S. Senate Republicans' proposed changes to President Donald Trump's sweeping tax-cut and spending bill are expected to push U.S. debt levels higher, roughly in line with projections from the House-passed version, analysts said on Tuesday.Senate Republicans on Monday unveiled proposed changes to the bill the House of Representatives passed last month. The proposals, subject to ongoing negotiations, would make some business-related tax breaks permanent while making the deduction for state and local income taxes more limited. "The fiscal effects of the Senate’s legislation as it currently stands look likely to be similar over the next few years to what the House passed," Alec Phillips, an analyst at Goldman Sachs, wrote in a note on Tuesday. The proposals will likely add "at least a few hundred billion dollars" to the estimated 10-year cost of the legislation, he added.The House-passed legislation would add $2.4 trillion to U.S. government debt over the next 10 years, or $3 trillion if interest costs are taken into account, the nonpartisan Committee for a Responsible Federal Budget estimated earlier this month. The cost would reach $5 trillion over a decade if policymakers extend temporary provisions, the committee has said. No formal cost estimates by the Joint Committee on Taxation, a nonpartisan committee of the U.S. Congress, and by the nonpartisan Congressional Budget Office have been released since the Senate proposals.Concerns over the fiscal impact of the bill have been a key driver of the U.S. bond market in recent weeks, as a meaningful increase to the $36 trillion U.S. debt pile could push Treasury yields higher due to more sizeable government debt sales."A key contributor to the bond-bearish narrative at the moment is the GOP’s (Grand Old Party) budget bill," BMO Capital Markets analysts said in a note on Tuesday.The core of the bill remains similar, they said, as it would extend the bulk of 2017 tax cuts expiring at the end of this year and eliminate taxes on Social Security, overtime and tips."At the end of the day, there will still be a significant increase in the deficit that the Treasury Department will be tasked with funding," the BMO analysts said.Reporting by Davide Barbuscia; Editing by Mark Porter

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Profit taking pressures gold; silver soars to 13-year high

WASHINGTON, June 17 (Reuters) - Federal Reserve officials met on Tuesday armed with new economic data that could give more weight to their concerns that Trump administration policies, or at least the intense uncertainty around them, will slow growth in the coming months.Shortly before the start of the two-day policy meeting, the U.S. Commerce Department reported that U.S. retail sales fell 0.9% in May, exceeding the expected 0.7% decline in a Reuters poll of economists and marking the biggest drop in four months. The U.S. central bank itself then released a report showing a surprise contraction in industrial production last month. The data, however, was hardly clear-cut.The retail sales report, with revisions also showing a small drop in April, was heavily influenced by slower auto sales after a surge earlier in the year driven by consumers hoping to avoid 25% levies on imported vehicles. Bad weather may have also been an influence, said Bradley Saunders, a North America economist at Capital Economics, with sales of an underlying group of goods more closely related to broader economic conditions suggesting "overall consumption continues to look healthy."The 0.2% drop in industrial production, however, pushed overall capacity utilization down 77.4%, its lowest level since January. A separate survey showed sentiment among homebuilders slid to the lowest point in two and a half years amid weak demand among buyers and high financing costs, a factor tied to monetary policy and the Fed's reluctance to reduce interest rates any further until it is clear that President Donald Trump's tariff policies won't lead to a persistent increase in inflation.Recent inflation data has been tame despite rising tariffs, but the Fed is still trying to reduce the pace of price increases to 2% after it surged in the years following the COVID-19 pandemic - with tariff-driven price hikes still seen as on the way.The risk of rising prices remains a dominant concern for the central bank despite signs the economy overall may be slowing. Trump's final tariff plans remain unclear, with trade deals promised but still not done with dozens of nations he has threatened to tax, and one-off proposals to levy specific goods like appliances that may or may not be implemented.Ongoing hostilities between Iran and Israel, meanwhile, have boosted the price of oil, another risk the Fed must contend as it prepares to release on Wednesday a new policy statement and updated policymakers' economic and interest rate projections.James Knightley, chief international economist at ING, noted that the retail sales data is not adjusted for inflation, and the drop, once accounting for price rises, "paints a weak picture that reflects subdued consumer confidence readings. Households are nervous that tariff-induced price hikes will squeeze spending power while respondents have become much more cautious on job prospects, and this suggests that consumer spending will continue to cool through this year."How to balance the risk of slowing growth against the risk of anticipated higher inflation will be at the center of Fed policymakers' debate on Tuesday and Wednesday, along with likely discussion of the implications of the crisis in the Middle East.FED FORECASTSThe U.S. central bank is widely anticipated to leave its benchmark overnight interest rate in the 4.25%-4.50% range, where it has been since December, and repeat that it can't give much guidance until it is clearer whether Trump's import tariffs and fiscal policies push inflation higher, undercut growth, or - as his administration contends will happen - keep growth on track while prices ease. Trump has demanded immediate rate cuts.Days of intense missile exchanges between Israel and Iran, however, have presented the Fed with even more reason for caution after oil prices jumped again on Tuesday and presented a possible new source of inflation.The conflict highlights the uncertainty Fed officials say has gripped their policy debate since Trump returned to power in January and unveiled a far more aggressive effort than expected to raise import taxes and rewrite global trade rules.Fed officials and many economists have largely expected that Trump's trade policies will have a stagflationary effect on the U.S. economy, simultaneously slowing growth and raising prices, with the monetary policy path - whether rate cuts or an extended hold of borrowing costs at the current level - dependent on which problem seems to be more serious.The Fed will issue a new policy statement as well as updated projections for the economy and the benchmark interest rate at 2 p.m. EDT (1800 GMT) on Wednesday, with Fed Chair Jerome Powell scheduled to hold a press conference half an hour later.The central bank's Summary of Economic Projections may draw more attention than the policy decision itself, as analysts and investors look for evidence of how Fed officials' views of the outlook have changed since their last set of projections in March, before the scope of Trump's tariff plans became clear but also before he delayed some of the stiffest levies in the face of largely negative market reaction.Fed officials in March marked down their expectations for economic growth this year and raised their level of expected inflation, but left unchanged the median outlook for two quarter-percentage-point rate cuts this year. Though that rate outlook matched the one inDecember, the spread of views in the Fed's "dot plot" chart narrowed, and some analysts anticipate a further hawkish shift in light of the central bank's emphasis on keeping inflation controlled and expectations that Trump's new tariffs still will lead to price increases."Trade policy developments have likely led to a significant change in Fed forecasts," towards even slower growth and higher inflation this year than expected as of March, Michael Feroli, chief U.S. economist at JP Morgan, wrote on Friday."These stagflationary revisions don't point to a clear direction of the revision to the dots. Even so, we think the dots will revise in a modestly hawkish direction" with only a single rate cut this year.Reporting by Howard Schneider; Editing by Paul Simao

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